The Confirmation by the Transports Explained

In light of the recent rally in the Transports I thought that it would be
appropriate to discuss the Dow theory and this recent move by the Transports.
According to Dow theory the confirmation of a trend occurs when both averages
better their previous Secondary high or low point, depending on whether or
not the trend is up or down. Without going into exactly how you define a Secondary
high or low point let me just say that the May 2006 highs marked the last Secondary
high in both averages. This level is noted by a blue horizontal line on the
Dow theory chart below and is also labeled with a 4. Before that, the previous
Secondary high points occurred at the March 2005 high. That level is noted
in green and is labeled with a 3. As of May 2006, with both averages well above
their previous Secondary high points, again that being the March 2005 highs,
both the Transports and the Industrials were "in gear" and made joint highs
in May 2006. The closing high at that time for the Industrials came on May
10, 2006 at 10,642.65 and on the Transports the high close occurred one day
earlier on May 9, 2006 at 4,998.75.

So, as of May 2006 the averages were confirming each other and in that respect,
all looked well. It was the Dow theory phasing and valuations that were not
making sense at that time. Now, many of you may be thinking, wait a minute.
Back in May 2006 the Transports were sitting at an all time new high, but the
Industrials had not yet moved above their 2000 high. Therefore, how could the
averages be "in gear" with each other? Today, I want to attempt to explain
this. First, let's talk about the 2000 high, which was obviously an important
high, but it had to do with the Dow theory phasing, not trend confirmation.
These are two entirely different issues.

Let's begin this explanation with the Dow theory chart above and the Secondary
high point labeled with a "1." Once both averages moved above this level, as
is indicated in red, the trend was confirmed as having been up. This is true
because of the fact that the previous Secondary high point had been bettered.
So, let me stress that at that moment, the averages were at that time in sync
to the upside. But, also at that time we had a Dow theory phasing issue at
play. This phasing issue was at that time telling us that the 2000 top marked
the top of a giant secular bull market that had been in effect since 1974.
The phasing aspects of Dow theory indicated that the advance up out of the
2002 low was a counter-trend move separating Phase I from Phase II of a newly
born secular bear market. So, there were two very different issues at play
here.

Anyway, the averages ultimately advance up into the next Secondary high point
labeled "2." At that high there was a minor non-confirmation in that the Transports
topped in January 2004 with the Industrials topping in February. That minor
non-confirmation lead to the decline into March 2004, which marked the next
Secondary low point for the Transports. Then, by late June the Transports had
once again moved above their previous Secondary high point, but the Industrials
had not. This in turn created yet another non-confirmation at a Secondary level.
That non-confirmation seemed ominous to the averages, but then in December
2004 the Industrials finally reconfirmed the Transports and once again the
averages were back "in gear." A correction followed immediately after this
confirmation as the averages moved into the January 2005 lows. From there,
once again, the previous Secondary high point, number 2, was bettered as the
market moved into a new Secondary high point in March 2005, which is labeled
number "3." At that point, again, the averages were back "in gear" to the upside.
All the while, we had the longer-term phasing issue surrounding the 2000 top
at play. Nonetheless, the averages were once again "in gear" to the upside.
From the March 2005 high the averages drifted sideways into October 2005. In
November 2005 the Transports moved back above their March 2005 Secondary high
point, but the Industrials did not. So, yet another non-confirmation was born.
Then, in January 2006 the Industrials joined the party by moving above their
March 2005 Secondary high point and once again both averages were back "in
gear." This then carried the market up into the May 2006 top at which point
both averages made a joint high and once again were "in gear" with each other.
All the while, the Dow theory phasing issue concerning the 2000 top was still
lingering and still indicating that the rally out of the 2002 low was a giant
counter-trend move separating Phase I from Phase II of an ongoing secular bear
market. Anyway, from the May 2006 highs, the averages moved down into their
Secondary lows back in the summer. It was from those lows that the latest non-confirmation
began. As you can see, in late September the Industrials moved once again above
their previous secondary high point and this time the Transports lagged creating
yet another non-confirmation. Then, on February 2, 2007 the Transports closed
at 5,006.89, which finally topped the May 9, 2006 Secondary high point close
of 4,998.75. In doing so, this once again put both averages back "in gear" to
the upside.

What has now changed is with the latest advance, both the Industrials and
the Transports are now at all time new highs. With the Industrials moving above
the 2000 high it now means that the phasing concerns, that had been at play
since the 2002/2003 low, have been proven inapplicable. In turn, this proves
that by far the most important aspect of Dow theory is in fact the Secondary
price movement and as of this writing both averages are once again "in
gear" to the upside. The much longer-term Dow theory phasing is valuable, but
I feel that the evidence shows us that it can only be used reliably after the
much longer-term picture is confirmed much further down the road, say after
Phase II is confirmed rather than during what may appear to be a Phase I move.
Understand that I am in no way minimizing the Dow theory. I'm merely saying
that the price action since 2002 has definitely proven that the "Secondary
movements" are by far the most important aspects.

So, the thing that most people are now wondering is, what does this latest
confirmation mean? I hear some say that it means we are now in a new bull market.
I also hear others say that the Transports have joined the party late. Truth
is, the Dow theory does not tell us either. This latest confirmation by the
Transports merely tells us that the Secondary Trend has been reconfirmed. It
does not tell us how far the averages will go. This confirmation merely serves,
just as the previous confirmations did, to reconfirm both the Secondary trend
and now with both averages at all time new highs the latest confirmation also
serves to confirm the Primary trend. I can also tell you that this confirmation
does not signal a "new" bull market, but rather reconfirms the existing bull
market.

Cycles are not a part of Dow theory, but they are a separate tool that allows
us to quantify trends of like degree and to develop longer-term expectations
that are based upon statistical probabilities. It is the cycles work and the
related statistics surrounding the 4-year cycle that causes me to believe that
the Transports have joined the party late in the game. I realize that most
of the rest of the world believes that the 4-year cycle bottomed at the June/July
2006 lows. But, my statistical and trend quantifications do not support this
popular notion.

I have been saying for well over a year that the 4-year cycle low would occur
in 2007 and not 2006. This was first documented in January 2006. Based on these
same cyclical quantifications I was able to call the May high as well as the
summer low and reported publicly in June that the summer rally had begun, but
that the summer low was not the was not the 4-year cycle low. Today, nothing
has changed this opinion. In fact, the statistics surrounding this setup actually
called for yet additional new highs and that was reported to subscribers back
in November and has unfolded pretty much to script. But, I will also add that
it was in September that I began to get very skeptical of the current advance
and that skepticism has not changed. However, in spite of my skepticism, my
original intermediate-term buy signal that occurred at the summer lows remained
intact until early December. Honestly, I did not expect it to hold up that
long, but it did and above all I follow the indicators. I'm now neutral and
more skeptical than ever. I still look for the 4-year cycle low ahead and this
opinion is based on statistical data that I have been watching unfold for just
over a year now. All the while, we are seeing extreme complacency, continued
record sentiment readings and a VIX that is at 13 year lows.

This reminds me of 2001 when with the Industrials well over 10,000 I was calling
for a drop into the 2002 4-year cycle low with a minimum price target calling
for a violation of the 1998 4-year cycle low at 7,400. That call was based
on these very same statistics surrounding the 4-year cycle. I was told that
I was nuts. I was told that the 4-year cycle had contracted and that it had
bottomed in 2001. I was told that this time was different because of 911,etc,
etc, etc. Obviously, as it turned out, the statistical data proved correct
and here again I'm simply going with the hard cold data. I will not be swayed
by popular opinion that is not based in fact, but rather largely in emotion.
My approach is disciplined and it has specific rules and guidelines. I'm sticking
to this data once again until/unless it is proven wrong. All the while, I think
that every last possible participant is being sucked right into the market,
as is typically done at 4-year cycle tops and as the public once again thinks "This
time is Different." Based on the statistics, there is a surprise in the making
and very few believe it.

Should you be interested in on going developments with the Dow theory as well
as a very detailed and factual quantitative cyclical analysis, with a focus
on the 4-year cycle, then you should consider Cycles News & Views. Such
analysis and on going developments are far beyond the scope of these brief
articles. I cover not only the stock market but, the dollar, gold and bonds.
I also report on other key markets such as oil, gasoline and copper at important
turn points, using my Cycle Turn Indicator, and I do updates three times a
week. This indicator has proven to be the single most valuable tool I have.
A more recent call by the Cycle Turn Indicator was the down turn out of the
December counter trend bounce in oil and then the low that was made in January.
Also, the Cycle Turn Indicator turned positive giving me and my subscribers
a buy signal on the Transports in early January. If I could only have one indicator,
it would be the Cycle Turn Indicator. Get the technical and statistical facts
and know when significant turns come based on the ever so important Cycle Turn
Indicator. www.cyclesman.com/testimonials.htm.